Forecasting Healthcare in 2013: Trends, Opportunities and Threats to Watch
On February 20, Becker's Hospital Review hosted a webinar that featured six leaders from different areas within the healthcare industry to discuss current challenges and opportunities, including those facing ambulatory surgery centers and health systems. The webinar was moderated by Scott Becker, JD, CPA, publisher of Becker's Hospital Review and partner with McGuireWoods in Chicago.
W. Michael Karnes, CFO and co-founder of Regent Surgical Health
Greg Koonsman, senior partner and founder of VMG Health
Deborah Lantzy-Talpos, RN, head of Aetna Hospital Solutions
Mark Madden, senior vice president of executive search with B.E. Smith
Gordon Mountford, executive vice president of healthcare solutions at Huron Consulting Group
Michael Perry, MD, medical director at Laser Spine Institute
The following is an excerpted transcript of the event's discussion.
Scott Becker: Debbie, where do you see hospitals moving quickly to adopt ACO concepts? How do they work with Aetna?
Deborah Lantzy-Talpos: That's really what I see as the greatest current opportunity for health systems as pressure continues to mount for health systems and providers to deliver higher value care and accountability. Regardless of how you feel about how fast the transformation will occur in the delivery system, there's opportunity now to reduce costs and improve quality and safety.
The opportunity now is to really embrace clinical integration and accountable care. There's tremendous opportunity for high-performing health systems to partner with high-performing health plans to lower costs and improve quality. Aetna today is partnering and collaborating with health systems and provider groups across the country to deliver value-based accountable care.
Mr. Becker: Do you see hospitals more effective in managing care for their own population than the general population?
Ms. Lantzy-Talpos: There is a lot of variability there. I'd say there's been a lot of work done by health systems on managing their Medicare risk populations effectively and having that population under management. We have 69 collaborations focused on Medicare lives right now and making sure incentive reimbursement is available and information is being used effectively.
I'd say many more hospitals are taking on employee lives now as they build capabilities to manage risk and do population health improvement. With a large health system, and the number of employees who are self-insured, there is no down side to increasing the quality of care and safety for those populations while also reducing costs. The focus on employee lives is relatively recent, but at the same time, there have been some systems that have done a great job on employee lives.
Mr. Becker: Greg, what do you think are the biggest opportunities and threats to hospital systems today?
Greg Koonsman: Our background is in the transaction-related valuation. For the last almost 20 years now, we've been watching health systems and other providers go about their strategic imperatives. As healthcare reform became more and more of a reality, we saw the strategic imperative was to become both vertically and horizontally bigger. The vertical integration has been in the form of health systems acquiring physician organizations of all types, primary care and specialty care, as well as acquiring or joint venturing outpatient services in outpatient surgery, imaging and cancer.
Mr. Becker: This coming year, do you see more focus on horizontal integration or more focus on developing a vertically integrated system in a geographic area?
Mr. Koonsman: It started off as more of a vertical integration opportunity set, where health systems wanted to build physician networks and acquire providers right in their immediate sphere of influence. In last couple years, though, we're seeing a lot more momentum in horizontal integration — health systems trying to get bigger outside of their existing region. It's been a bit of a challenge, though, because of the fact that health systems have such a high leverage rate.
Generally speaking, systems are probably 70-75 percent debt related to the total value of the health system enterprise. With that kind of leverage and the fact that 80 percent of the market is non-profit, their only source if capital is tax-exempt markets. We're finding that horizontal integration is a real challenge for health systems because of the access to capital. That's why we're seeing many more non-profit and for-profit joint ventures.
Mr. Becker: Gordon, thoughts on the biggest opportunities and threats you're seeing across the universe of your hospital system clients?
Gordon Mountford: I think the opportunity is really to try and get ahead of the market, as the market shifts from volume to value. The pace of change in every market is different. For those in more fee-for-service markets that are shifting slowly, you have more time to prepare yourselves for the change about to come, whereas others find themselves already on the edge trying to figure out what they'll do to protect their revenue base while trying to figure out how to work in a capitated world.
The threat is if you're not ready, and haven't positioned yourself, you're in trouble. Some of the more innovative systems are making those investments organizationally and operationally, looking at the things they need to do to get their cost structure, strategy and relationships aligned as they move into this population-based management model.
Mr. Becker: Are there characteristics of markets that are moving quicker than others?
Mr. Mountford: That's a good question. There are certainly some influencing factors. Number one is the current market structure and what the relationships with payors are like. How aggressively are payors pushing change in that market? We're starting to see some markets where the large academic medical centers, which have kind of been sitting on the sideline because they've felt somewhat immune to a lot of the changes in the industry, now all of a sudden they're looking at market share and market strategies and pushing change within those markets.
There's a confluence of different factors driving the changes in each market. It's interesting that they are all in different places and the strategies all seem to be a little bit different. The one common denominator is really the cost structure.
Mr. Becker: So many hospitals have bought a lot of practices and done vertical integration to ready themselves for the future. What's the risk that some systems have left themselves with too big of cost or debt structures to react well to changing reimbursement?
Mr. Mountford: I think that probably holds itself true for a big chunk of the market. The horizontal evolution we're seeing falls in the clinical transformation area, [in which] how care is delivered across the continuum is driving some of the IT infrastructure changes that are needed, as well as the coordination of various caregivers. You can't look at it at a vertical basis anymore. You have to figure out how each of these dots is connected and how incentives are aligned to ensure the ultimate outcome is at the desired level.
Mr. Becker: Mike, can you talk to us about what you see as greatest threat and opportunity to health systems today from your vantage point?
W. Michael Karnes: The thing that concerns me as I look at our hospital partners is a real unevenness in the quality of their management teams and the way they run their businesses. [It's concerning] when you have a facility that has high cost, high leverage, and an income statement which is a substantial part of the cost structure that doesn't vary directly with revenue, and you lose revenue through competition or reimbursement going down. What concerns me is looking at hospital partners and seeing ones with high cost structures and weak balance sheets already.
I think the opportunity is the parallel side of the threats. The hospitals that have strong balance sheets and provide good services are able to consolidate through the industry to some degree.
Mr. Becker: Dr. Perry, you founded and built one of the most successful spine surgery companies in the country. Where do you see threats and opportunities for hospitals, or if you feel more comfortable, for the spine business?
Dr. Michael Perry: As far as opportunities, we work in ambulatory surgery centers. More spine surgeries are tending toward outpatient facilities. I think people see the advantage of performing spine in these settings: Hospital stay costs are down, infection rates are lower and of course comparable outcomes. I see that as a great opportunity for us. As for hospitals, that can be an opportunity or a threat. Hospitals now are trying to align themselves with ASCs and purchasing ASCs close by, so that's an opportunity, but if it's not owned by the hospital, then obviously it can be looked at as a threat.
Something to be concerned about is the entire U.S. healthcare system changes that will come with Obamacare. Nobody really knows what will happen ultimately, but in January 2014 is when the system will take place. We're preparing ourselves for that and looking at possible alignments with other healthcare organizations. The bigger you are, the more power you have. I also think that from an insurance perspective, with healthcare costs going up, reimbursement for ASCs might change. I think those are the biggest threats facing ASCs like ourselves.
Mr. Becker: How much concern do you have for payors trying to reduce the use of spine surgery as a way to treat spine and back pain, through either evidence-based medicine or discouraging spine operations?
Dr. Perry: I think that's great. I look at spine surgery as a last resort. We have people coming in all the time who injured their back three weeks ago. That's certainly not an indication for surgery, unless there's some neurological deficit. So we tend to take people who have been in pain for number of years and tried multiple conservative treatments. When those fail, or their pain is at level that interferes with their daily activities, then surgery might be answer. But if we can treat back pain and a herniated disc without surgery, I'm all for that.
Mr. Becker: Mark, with all the changes in executive suites today, are you seeing quicker turnover of CEO and CFO spots in hospitals and health systems, or about the same pace as before? How are all the changes in healthcare affecting the C-suite?
Mark Madden: We have seen an increase in the turnover at that C-suite level. It's been caused by a couple different things, and one is retirement. Those retirements are coming about either because of age, [or] we've seen some C-suite folks retiring earlier than anticipated because they've indicated they don't want to go through another major change in healthcare. They don't have energy, so they're leaving early. The other reason for the turnover is, when you look at integration, mergers and acquisitions, we're finding that some of those C-suite folks become displaced. Depending on where they are in their career, they may make a choice to retire for good or look for other opportunities.
Mr. Becker: Are there different C-suite skill sets people are looking for today than they were even five years ago?
Mr. Madden: It is very different, Scott, and I'll focus on a couple things, specifically at the CEO level. It's about building relationships but also about being innovative thinkers. We're going into a situation with our industry where we have an age of accountability. We need people open to looking at non-traditional alliances and innovative thinking. When we look at CFOs, for example: The baseline [skill] is to be very good technically and know their business. But we're seeing a softer side to those skills — to be an integrator, a good communicator and a good visionary. Five to 10 years ago, those weren't primary must-haves for your next CFO.
Mr. Becker: Debbie, you have insurers and systems trying to compete with some larger systems, such as the Kaiser model. How does Aetna work with a local hospital to be able to compete with a dominant hospital in a region?
Ms. Lantzy-Talpos: The Aetna vision is that we don't need to do complete vertical integration and acquire the delivery system. We're really looking to partner with high-performing providers. All of the investments we've made in care management and the ability to manage risk — we want to bring that to the table with the delivery system. Frankly, there's a very significant amount of change that needs to be addressed in the healthcare system as a whole. Aetna doesn't feel like it has the answer on its own. By partnering with the delivery system and providers, we think we will be able to compete very successfully. The ideal market to be working in is one in which competition is desirable. There are many forces in the marketplace that are pushing pricing to be more or less established. So it does feel like either the market or the government is pushing for prices to be pretty narrowly set.
Mr. Becker: Let me ask you a question, Gordon. How does a second size hospital in the market compete with the principal hospital in the market?
Mr. Mountford: That's a tough question. I think what you're starting to see are some new relationships formed, particularly in the second- or third-tier hospital community, where they're trying to figure out how to survive in this new age. I wouldn't call [Oakbrook, Ill.-based] Advocate Health Care a small system by any stance, but they are selective in the Chicago market in looking at selective relationships with the payors. The incentives are aligned appropriately to grab market share they wouldn't have otherwise. It's not necessarily a Kaiser model, but it's certainly a model that aligns incentives on the payor and provider side. In other markets with smaller hospitals, community hospitals are trying to figure out where they fit in and how they will survive. It takes many forms, from relationships with other health systems to new network strategies with their physicians. I'm not sure there's a single answer here. I think it's going to come in many forms depending on the market.
Mr. Becker: What do you see as differences in alignment of physician practices in rural markets versus metropolitan markets?
Mr. Koonsman: I think it somewhat depends upon how many hospitals or health systems are in those markets. What we're finding is if there's a competitive environment with more than one hospital, and one of those hospitals decides to start acquiring physician practices, then by definition, the other system goes on the defensive. It's really market by market and whether you have a high level of physician acquisition activity. Some markets are just now starting up.
Mr. Becker: Mike, are you seeing markets you're in affected by physician employment?
Mr. Karnes: The employment issue — we faced [it and] lost some doctors we didn't want to lose. But, in general, it hasn't been an issue we haven't been able to work around. I think it's market specific and also determined by the power physicians have in a market. If there are a lot of single practitioners or small practices, I think they are much more susceptible to these pressures. If they are larger groups, I think they can stand up to payors and hospital systems and have more control. I've seen larger practices not only move cases from one hospital to the other, because they didn't like the direction the one hospital was taking, [and] I've also seen a large single specialty practice [get] better compensation for their surgery centers than what a large community hospital was able to get, largely because of the power of the physician group. I think to a large degree, it's determined by how physicians are organized in the market.
Mr. Becker: Dr. Perry, when expanding nationally, what's your thought on customer and patient analytics, or is it more about finding the right spine surgeons? And also, how much is the device tax impacting Laser Spine?
Dr. Perry: When we're looking at opening up [in a new] market, we don't [necessarily] look at where the surgeons are based. We look at demographics of the patients, the insurance [market] and the population within a certain radius of an area. Also, since we're a company not solely owned by physicians, there are state laws that don't allow us to practice in certain states, such as California. Another thing we look at is certificates of need. CONs would be a little bit more expensive, so we try to steer clear of those. We look at all avenues and pretty much do our due diligence when serious about expansion.
The device tax is not really having an impact on us per se at this time. We don't produce devices, but they are the products we use. Are those [prices] going to go up? I'd say probably. They will pass it onto the consumer, and we're the consumer. I can just see that tax being levied to people who purchase medical devices.
Mr. Becker: Gordon, let me turn back to you for a couple questions. Are you starting to see your clients look at the sequester — its potential impact on hospital revenues and the ability to invest? Has that been an issue itself? Or, separately, have reimbursement concerns led hospitals to generally be more concerned about spending going forward, whether IT or other things?
Mr. Mountford: I think it's probably more the latter than the former, but the right answer is probably all of the above. I think sequestration and the reality that healthcare reform will impact business overall is driving everybody to make the changes that they needed to, probably several years ago. A lot of people sat one sidelines until six months or a year ago, and now you're seeing a huge focus on cost reduction and getting the organization to the right size given where they think they'll end up in the marketplace.
Mr. Becker: You see more and more of the bond rating agencies starting to reduce credit scores for hospitals. There are more reports of hospital layoffs. How much of an atmosphere out there do you see with hospitals battening down the hatches, or do you still see systems looking at serious investments and growth?
Mr. Mountford: We're seeing both. Larger health systems, those that meet the definition of large integrated delivery networks or faith-based systems, that have capital to withstand some of the more immediate challenges are making investments to really understand what clinical integration means within their organizations. They are also starting to make acquisitions necessary for them to manage health at a different level. I also see just the opposite. This is probably more of your smaller/midsize providers that just have a simple cost problem. They have debt requirements that are being challenged in the short term. Also, as they look out over next year or two [and] changes in reimbursement, if they don't get their costs aligned, they'll be in trouble. It's really market by market.
Mr. Becker: Mark, two questions. The individual hospital not affiliated with a chain or larger system — how often do you get a panicked call from their board of directors, saying, 'We need to find a new CEO or CFO today or tomorrow?' Is that more prevalent today than a few years ago? What's your sense of the independent hospitals that are reliant on their own talent pool versus being part of larger system?
Mr. Madden: As all of the panelists have talked about, as margins get tighter and relationships are much more under the microscope, CEOs and CFOs specifically have much less margin for error. When they sense things are wrong or are not going in the direction they feel is going to be long-term for them, they make sudden decisions and leave. We get those questions quite often. The difference we have now is that, in the past, when board members called and talked about candidates, they wanted somebody who helped them maintain independence. That has changed fairly dramatically. Now they want someone who can think with a broader vision: 'When would it be appropriate and what would be the right kind of opportunity for us to form an alliance or integrate with someone else?'
Mr. Becker: How much M&A activity are you seeing where a hospital is buying a hospital in a neighborhood adjacent to it, versus a national chain buying something in a completely different area than their core base? How much activity is truly local within a couple counties versus national?
Mr. Madden: I'd say it's maybe 50-50. We do see a lot of activity local because they feel like they know that market. Larger organizations, especially a couple of the large Catholic-sponsored organizations, obviously we're seeing that in a much broader perspective nationally.
Mr. Koonsman: Any time one of these hospitals with single-digit margins facing uncertainty goes for sale, we see the strong, local players bidding for it, and for-profit chains bidding for it. But the new entrant to the fray are the large, non-profit systems. The national systems like [Livonia, Mich.-based] Trinity Health, [St. Louis-based] Ascension Health and [San Francisco-based] Dignity Health. What's really interesting is that one can move very, very fast and has lots of capital — the for-profit providers — and one has more limited ability to move quickly and pay up. I think what I'm seeing is the big, non-profit national players are getting much more involved in acquisition activity and are getting better and better at competing with for-profit providers for deals.
Mr. Becker: How much M&A activity is funded by private equity and for-profit investors versus non-profit investors? What's your breakdown?
Mr. Koonsman: I think all you have to do is go back to the bond markets and start doing some analysis. You recognize that, if you look into the future, the bond rating agencies have a very difficult time not seeing more headwinds than tailwinds for these large systems. That's their challenge. The tax-exempt bond market is not the greatest place right now for these systems. I think we'll see much more activity in non-profit and for-profit joint ventures for an acquisition.
Mr. Becker: Dr. Perry, how much measurement of patient satisfaction are you seeing and doing? How important is it?
Dr. Perry: We take patient satisfaction extremely seriously. We like to look at our facilities as patient-centric. Our patient satisfaction is around 95 percent. Considering we're doing spine surgery, we have an 85 percent success rate. We follow patient satisfaction between all of our surgical centers and have friendly competitions between surgery centers on who will have highest patient satisfaction for the month. It's extremely important from our perspective. I think every healthcare facility should feel the same way.
Mr. Becker: Mike and Gordon, how much are you seeing in terms of your centers or clients spending more or less effort on satisfaction scoring?
Mr. Karnes: We do patient satisfaction surveys every month. We also survey physician satisfaction levels and employees, and we monitor those about twice a year. We feel physicians are as much of our customers as the patients are, and it's important for us to survey them as well. We take that very seriously.
Mr. Mountford: I think [they're putting] a lot more [effort into it] than they used to. These providers are going to have to create stickiness beyond anything they had before. Really understanding what's expected to attract patients on a more sustainable basis will be critical in an ACO environment.
Mr. Becker: Debbie, your thoughts on patient satisfaction? How are hospitals tackling it?
Ms. Lantzy-Talpos: Patient satisfaction is really that third leg of the stool: Lowering costs, improving quality and improving patient satisfaction. Satisfaction and engagement is a critical component of what we're trying to do. We learned from the failure of managed care in 1990s, when there wasn't emphasis on patient satisfaction. In this current accountable care organization and patient-centered medical home environment, there is so much emphasis on capturing and engaging patients. I think it's incredibly important, and we're looking at all different ways to measure engagement and satisfaction.
Mr. Becker: Are you seeing a de-Catholicization of healthcare? Mark, any thoughts on this?
Mr. Madden: There have always been traditional alliances, [but] now we're seeing so many changes and that is one of them. We're seeing that. It depends on the market. It depends on what large systems, and whether they're for-profit or non-profit, are active in the marketplace. It has changed, and I expect it to probably continue to change.
Mr. Becker: Any other thoughts on growth or decline of religious institutions?
Mr. Koonsman: All you have to do is look out West and see what Dignity Health did. That creates a bit of a trend. I believe really the necessity to survive and thrive is going to outweigh anything. If you have a Catholic health system and the best business course of action is to affiliate, sell or merge with a non-Catholic organization, I think you're going to see more of that. I believe those systems would probably prefer to stay within a Catholic organization, but they might not have a choice. It may not be the best business decision.
Mr. Becker: We have time for each person to give one final thought on what they think is the most important thing for health systems to do right now.
Mr. Madden: We're going into a time when the workforce will be evolving and changing. A lot of people will be leaving, and we have multigenerational diversity, much more so than we have had in previous 20 years. I think organizations that will be successful are those that create environments that support high-performing leaders and workers, and generational diversity. And being able to identify those high-performers and retain them long-term, because there will be a war for talent as we see a shrinking in the availability of strong leaders at mid- and high-levels of leadership within an organization.
Dr. Perry: I think it's patient satisfaction. Outcomes are important. Combining surgical outcomes with patient satisfaction — I think that's what healthcare companies really need to start focusing on. If we're going to come into a payor system that will send patients to more better outcome-based facilities, that will ultimately be a win-win.
Mr. Mountford: Focus on the fundamentals. Understand truly who your market is and where you'll end up. And prepare yourself for the day when the last fee-for-service bill goes out the door.
Ms. Lantzy-Talpos: I agree with the previous comments, but in particular the idea of focusing on building a healthy, high-performing workforce and prepare for population health management now. Get going early. Do whatever can be done to lower costs now — operating efficiencies, reducing the costs of care and eliminating practice variation.
Mr. Karnes: Two things: Treat your business as a business. When you're making capital decisions, in the coming world, you have to treat it like a business. And secondly, treat your doctors as partners. That will help open recruitment and retainment.
Mr. Koonsman: The big issue will be the significant reduction in the cost structure of healthcare while maintaining patient satisfaction and not having a replay of the '90s where we tried reducing costs significantly but it kind of backfired in quality and patient satisfaction areas.
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